Category Archives: Health Care

Forecasting Medicaid Costs and Risks

Beginning Jan. 1 of next year, able-bodied adults earning up to 138% of the Federal Poverty Limit (FPL) will be eligible to enroll in Virginia’s expanded Medicaid program. The financial impact on Virginia taxpayers will depend in large measure upon the percentage of eligible recipients that decide to enroll. A lot of people have taken a lot of guesses, but no one will know the financial impact until the expansion goes into effect and people either enroll or don’t.

A new Old Dominion University study, “The State of the Region; Hampton Roads 2018,” has taken a close look at the numbers. “Every estimate is fraught with uncertainty,” write the authors. “The best course of action is to present a range of outcomes.”

The percentage of the eligible population that enrolls is referred to as the “take- up” rate. In 2016, the Urban Institute estimated a take-up rate of 56.8% for a potential Medicaid expansion in Virginia. In 2017, the Virginia Department of Medical Assistance Services estimated that of 370,000 qualifying Virginia adults, 239,000 would enroll in Medicaid and 60,000 would transfer from other health insurance plans — effectively a take-up rate of 64.5%.

The ODU economics professors writing the study took their own crack at estimating the take-up rate for Hampton Roads. Drawing upon the experience of two neighboring states that expanded Medicaid in 2016, Maryland and West Virginia, they estimated a take-up rate of 44% for people under the poverty line and 55% above. Recognizing the uncertainties of any forecast, they estimated 20,000 newly eligible adults on the low side and 27,000 on the high side. Based on those forecasts, they estimated that costs to the Commonwealth for new enrollees in Hampton Roads will run between $16 million and $22 million by 2021.

The authors consider the expansion a net economic gain for Virginia and the region: improving health incomes for lower-income Virginians, reducing the level of bad debts and uncompensated care, and improving the financial health of hospitals.

But, just as continued increases in military spending in Hampton Roads is contingent upon the condition of the federal budget, the authors caution that the modest state share of the expanded Medicaid program — only 10% for new enrollees — is likewise contingent upon the condition of the federal fisc.

Interest expenditures on the national debt are projected to climb from $316 billion in FY 2018 to $992 billion in FY 2028, crowding out other categories of funding. “An economic downturn that places significant pressure on the federal budget could result in a retrenchment of Medicaid eligibility and an increase in the uninsured rate,” the authors warn. “While history may be a guide, it’s not a promise.”

If the federal government reduced its reimbursement rate for new enrollees from 90% to 50%, the financial liability to Virginia would increase five times.

Medicaid expansion is a done deal. There’s no point in re-litigating that case. But Virginia has to live with the fiscal consequences. And one of the things that happened when the General Assembly passed the expansion bill is that the Commonwealth assumed a risk that the federal government will not renege on its 90% promise. We have no way of knowing what will happen over the next decade — we don’t even know for sure how much Medicaid will cost us next year. But we can identify risks and prepare for them. The question is, will we? Or will we stumble forward blindly on the assumption that all will be well?

Update: Response to this post from the Department of Medical Assistance Services can be viewed here.

Who Pays for Health Care in Virginia?

Source: “State of the Region: Hampton Roads 2018:

Where do Virginians (and Hampton Roadsters) get their health insurance coverage? Like their compatriots in every state, Virginians rely upon an assortment of private- and public-sector programs. The table above, taken from “The State of the Region: 2018 Hampton Roads” report, shows that in 2016 a higher percentage of Virginians (59%) had employer-based coverage than Americans did nationally. Virginians also had a higher percentage (12%) of military Tricare coverage — with the percentage spiking to 27% in Hampton Roads.

Virginians relied slightly less in 2016 upon Medicare than other Americans, and much less upon Medicaid — a gap of nine percentage points. But the percentages will change as Medicaid expansion takes hold in Virginia, enrolling an estimated 400,000 near-poor.

Keep a close eye on the numbers. As the percentage of Medicaid recipients goes up, which categories will shrink? Ideally, the percentage of uninsured drops dramatically. We don’t want to see a drop in “employer based” insurance and “direct purchase” insurance (which I presume refers mainly to Obamacare), which would represent a shuffling of people from one insurance system to another, not an expansion of coverage. Let’s hope the ODU authors of the 2018 Hampton Roads report revisit the Medicaid issue next year.

Pulling Teeth: Admitting Errors in Dental Care Post

In a column posted last month, “The Political Economy of Dental Care,” I suggested that one way to improve the affordability of and access to dentistry services in Virginia might be to reduce the cost of educating dentists. I highlighted the high cost of completing a dental degree at the Virginia Commonwealth University, Virginia’s only school of dentistry. While I still maintain that the cost of attendance is so high that graduates feel compelled to set up shop into metropolitan markets where they can earn enough to pay off their student loans, I got some of my facts wrong.

In the post, I stated that the cost of attending the VCU School of Dentistry runs about $133,000 to $140,000 per year over four years. In fact, according to data published on the school’s website, the cost for in-state students runs between $85,000 and $89,000 a year and for out-of-state students between $114,000 and $119,000 — high, to be sure, but considerably lower that what I stated. (The four-year cost is estimated to be $344,000 for in-state students and $461,000 for out-of-state residents.

Compounding my initial misperception, I also stated that the cost of attendance at VCU was significantly higher than the national average. To the contrary, the School of Dentistry cites American Dental Association (ADA) data to the effect that VCU’s cost of annual D.D.S. education was lower than the national average for in-state students in 2017-18 —  $59,569 compared to $64,305. However, the cost for out-of-state students was somewhat higher — $88,073 compared to $81,939. (I’m not sure how the ADA data is reconciled with the cost-of-attendance figures on the School of Dentistry’s website.)

Thirdly, ADA data contradicts my speculation that Virginia dentists might graduate with higher debt than their peers outside the state. In 2017, the average debt was $162,384 for a VCU in-state student, $207,924 for a VCU out-of-state student, and $239,895 for students at public dental colleges nationally.

I also argued that “dental technicians” should be given freer rein in under-served rural areas to provide dental-related services. Nan Johnson, director of communications for the School of Dentistry, informs me I was using improper nomenclature. The term “dental technician” is not used in the profession. Rather, the classifications of those who work with dentists are referred to as dental assistants, dental hygienists, or dental laboratory technicians.

Finally, I referred to the Virginia Oral Health Coalition as “an alliance representing the dental profession.” In point of fact, says Johnson, it is an alliance “to ensure that all Virginians can access affordable, comprehensive health care that includes oral health.” The Coalition includes not just dental professionals but educators, health care providers, and community members.

I am duly chastened. I think the larger points of my piece still stands — the high cost of dental school aggravates the shortage of dental services in rural areas, and the dental profession’s solution is to increase federal and state spending rather than address the cost side. But it helps no one to employ inaccurate facts. Further, I had no basis for singling out the VCU School of Dentistry as being especially expensive. The high cost of dental education appears to be a national problem.

The Political Economy of Dental Care

The bad teeth guy in the movie “Deliverance”

No sooner has Virginia enacted one vast new entitlement, Medicaid expansion, than the drumbeat begins on the next. No matter how much money government dedicates to health care, food, housing, education, transportation, legal aid, or whatever, there is always someone who is getting the short end of the stick by comparison. Always. And the answer is always the same: Expand entitlements. Always.

The latest case in point is an article in the Virginia Mercury highlighting the deficiencies in dental care experienced by hundreds of thousands of Virginians — a dental gap bigger than void in the bad-teeth guy’s mouth above. No question, the problem is a real one. Dental care costs too much for poor and working-class Virginians to afford, assuming dental care is even available in under-served rural areas. And the consequences of poor dental hygiene can lead to serious medical complications.

What’s the solution? Reports Katie O’Connor:

For years, advocates, such as the Virginia Oral Health Coalition have pushed the state to add a dental benefit for adults. So far, Virginia has expanded dental benefits to pregnant women and children until they turn 20.

As of the start of this year, 17 states offered extensive dental benefits — including preventive and restorative procedures — to their Medicaid populations, according to the Center for Health Care Strategies, a group that advocates for improved health care delivery for low-income Americans.

A benefit, advocates argue, would make a major difference for the 1.2 million adults covered in the state’s Medicaid program.

Creating the entitlement in Virginia would cost between $24.4 to $60.8 million, O’Connor says.

Of course, you’d expect from an alliance representing the dental profession to advocate a new entitlement that creates more business for the dental profession. It should surprise no one that the proffered solution to the problem entails transferring money from taxpayers to dentists.

Here’s a different idea. Expand the supply of dentists and dental technicians. How? Maybe start by reducing the total cost of attendance at the Virginia Commonwealth University School of Dentistry, which now runs about $133,000 to $140,000 per year over four years. Nationally, dentists graduating in 2016 carried on average $261,149 in debt, according to the American Dental Education Association. That number could well be higher in Virginia where the tuition runs considerably higher than the national average.

I don’t know why the VCU dental school is so expensive. I conjecture that the tuition bears little relationship to the cost of actually providing the education, and that someone high in the VCU hierarchy has made the calculation that the university will charge what the market will bear. I further conjecture that the School of Dentistry is a lucrative profit center, which VCU is milking for revenue to subsidize other programs. I may be entirely wrong, but when tuition is higher than almost anywhere else in the country, that’s a proposition worth looking into.

Now, if you entered a profession that took you four years to complete (which means four years of earning no money) and cost you roughly $500,000 in tuition, fees, room, board and expenses, leaving you $260,000 in debt when you graduated, would you want to move to Southwest Virginia where there is a paucity of patients capable of paying charges sufficient to help you retire your loans? No, unless you’re incredibly idealistic and willing to live at the foot of the cross, you’ll move to the suburbs where you can make $150,000 a year and pay off your debts.

Let me venture another hypothesis, which any enterprising reporter could verify or falsify: Given the sky-high cost of tuition, Virginia dentists have exercised their clout through Virginia’s professional licensing system to restrict competition from allied professions, such as dental technicians. I would conjecture that dental technicians, like nurses, are seriously circumscribed in what they can do or the circumstances in which they can practice.

Dental technicians earn about one-fifth of what dentists earn. Yet in my personal experience, dental technicians do 30 or 40 minutes of work cleaning teeth and taking x-rays while my dentist spends about 5 minutes checking things over. I love my dentist — he’s a great guy, and I’ve been using him for 30 years. But I’ve really got to wonder why it costs me $200 a visit when dental technicians are paid (on average) about $35,000 a year or the equivalent (taking benefits into account) of maybe $30 an hour.

I’m betting that (1) dentists exercise a strangle hold on the ability of dental technicians to provide independent teeth cleaning services, and (2)bill for technician’s services at a rate that many would consider obscene. Perhaps such practices, if in fact they occur, are justifiable in areas with no shortage of dental practitioners. But are they justifiable in areas that can’t attract dentists? Would it not be better to provide access to dental technicians to maintain dental hygiene at lower prices and make referrals as needed to dentists to fill cavities and perform other more advanced procedures?

I have no expertise whatsoever in the practice of dentistry, and I fully concede that I may be making some naive statements here. But I am convinced that we need to look differently at the problem. Instead of asking whether we should expand entitlements, perhaps we should be looking at how to expand supply and bring down costs.

Peeling Back the Layers of Hospital Dysfunction

Image source: Wall Street Journal

There are many layers to the dysfunction of America’s (and Virginia’s) health care system. I have written frequently about price opacity, the inability of consumers to compare medical services by price. Prices are essential to a market-based economy. Indeed, one could say that without prices, it is impossible to have a market-based economy. I’m not sure how you’d label the system we do have — there’s too much private ownership to call it socialism. But whatever it is, it sure as hell isn’t a market-based system.

The question I continually ask is why. Why is there no price transparency? Part of the problem is the convoluted system in which hospital charges bear no relationship whatsoever the cost of providing the service. Hospitals post charges. Government programs (Medicare and Medicaid) and insurance companies negotiate the posted charges to a lower level. And consumers pay some residue of those lower charges based upon how generous their insurance plans are. I chronicled my own experience with price opacity in the Richmond health care market when I elected to undergo hip-replacement surgery. (See “One Man’s Descent into Healthcare Price Opacity.“)

A recent Wall Street Journal article suggests that the dysfunction is so extreme that hospitals themselves often don’t know how much it costs to perform a routine, commoditized procedure such as knee replacement surgery.

The article highlights a rare instance in which a hospital, the Gunderson Health System’s hospital in La Crosse, Wis., undertook a study to find out how much it cost to conduct a knee replacement surgery. The hospital had been routinely jacking up its charges by about 3% a year, reaching a list price of $50,000 by 2016. But no one knew how much it actually cost to do the surgery. After a detailed, 18-month review, the hospital concluded it cost at most $10,500 — including the physicians.

Thus, another part of the answer to my question is the failure in hospital accounting. Hospital charges are largely unrelated to cost because the hospitals themselves often don’t know what procedures cost. If hospitals don’t know what routine procedures cost, how can they make rational business decisions? How can they exercise cost controls? No wonder health care costs go nowhere but up.

Writes the Journal:

Hospitals can be shielded from the competition that forces other industries to wring out expenses and slash prices. Hospital list prices are a starting point for negotiations with insurance companies over what they will actually pay, and those deals are confidential. Consolidation has given hospitals greater pricing power in many markets, according to health-economics researchers.

“Being cost effective was not an imperative in that type of market dynamic,” said Derek Haas, chief executive officer of Avant-garde Health, a health-care cost and quality analytics company that worked with Gundersen. …

For consumers, the prices paid for the surgery at some hospitals in the U.S. were more than double the prices at others, according to an analysis of 88 million privately insured people to be published in the Quarterly Journal of Economics.

In a market economy, competition would work to drive down the price of elective surgical procedures. If Hospital A charges an excessive price for knee replacement surgeries, orthopedic physician’s practices or a competing hospitals could enter the marketplace, charge less, and gain market share. But here in Virginia, hospitals have consolidated into massive health care systems, and they have shut down competition through Certificate of Public Need regulation. Regulations restrict entry of newcomers into the medical marketplace, thus conferring monopoly-like protections on hospitals. Virginia hospitals are not compelled to drive down costs and reduce charges to stay in business. They just ratchet up their charges each year, immune to pressures from the marketplace.

So, what is Virginia’s political class doing about this? Basically, nothing. Rather than address the core issues of competition and price transparency, the political class is focused on doing what it knows how to do, which is rob Peter to pay Paul — in other words to redistribute wealth. Thus, the public policy debate in Virginia focuses on Medicaid expansion and who pays for it. Meanwhile, costs for everyone, rich and poor and in-between, continue to rise with no end in sight.

The Hidden Costs of Medicaid Expansion

This column, originally published by the Chesterfield Observer back in June, is a bit dated. I neglected to re-post it on Bacon’s Rebellion at the time. But, what the heck, with the new debate about how to dish out Virginia’s windfall from federal tax reform, it never hurts to remind middle-class taxpayers how they continue to get the shaft.

After years of debate Virginia has enacted Medicaid expansion. Backers of the new entitlement proclaim the legislation a humanitarian triumph, providing health insurance to as many as 400,000 Virginians above the poverty line and injecting some 2 billion federal dollars into Virginia’s health care system. Miraculously, the state will deliver this new benefit at seemingly no expense to Virginia taxpayers. The federal government will pay 90 percent of the cost, while the balance will be recouped through reduced expenditures on prisons, mental health and other state programs, plus a tax on hospital revenue.

As the old political saying goes, if something sounds too good to be true, it probably is. It always pays to dig deeper to uncover what the politicians aren’t telling you. And in the case of Medicaid-expansion funding, there’s a lot they are glossing over.

First, Virginia’s 69 private, acute-care hospitals will pay a $281 million provider “assessment” in the first two-year budget. Second, legislators need to find a comparably large sum to bolster Medicaid payments to physicians. By the time it all shakes out, taxpayers and paying patients could end up paying, by my estimate, on the order of $250 million a year in higher taxes and/or insurance fees – although, to be honest, no one really knows.

What, you didn’t read that in the newspaper? Gov. Ralph Northam and GOP lawmakers didn’t tout these costs among their list of legislative accomplishments? Welcome to Virginia government in the 21st century. The political class has perfected the art of picking your pockets so quietly you don’t even notice.

According to the Virginia Hospital and Healthcare Association, Virginia’s health care program for the poor at present reimburses providers only 71 percent of the cost of treating Medicaid patients – well below the 78 percent rate that state code declares to be an acceptable level. Virginia hospitals also provide hundreds of millions of dollars’ worth of charity care – free or discounted health care provided to low-income patients – and write off hundreds of millions more on bad debts. On top of that, the Medicare program for retirees is squeezing hospital payments, too, although not to the same degree. The VHHA claims that the Medicare shortfall reached $909 million in 2016.

Under those circumstances, hospitals have been reluctant to absorb the cost of a provider “assessment” to pay for Medicaid expansion. But in negotiations with legislators this year, hospital lobbyists folded. They backed the provider assessment knowing they’d gain roughly $2 billion in extra federal dollars.

Where will hospitals find $241 million for the assessment? That’s not at all clear. Collectively, Chesterfield hospitals generated almost $1 billion in revenue in fiscal 2016, according to Virginia Health Information data. They paid about $100 million in charity care, wrote off roughly $75 million in bad debt, and ran profits of about $80 million. In the first year the assessment will be 1.1 percent of net patient revenues, or about $10.8 million based on 2016 revenues; the second year the tax will be 2.3 percent, or about $23.6 million.

In theory, the influx of Medicaid dollars will reimburse hospitals for most of the cost of treating near-poor patients who account for the bulk of that charity care and bad debt, offsetting the tax assessment. No one has projected how it will impact finances on a hospital-by-hospital basis across the state. And no one has provided any guarantee that hospitals won’t pass on the cost to their privately insured patients. We don’t know what will happen. The hospitals probably don’t know yet either.

A related problem is that Medicaid’s reimbursements are so chintzy that many physicians don’t accept Medicaid patients. When there’s a physician shortage to begin with, the result is that many Medicaid recipients won’t be able to find a doctor. They’ll continue seeking treatment episodically in hospital emergency rooms, as they always have, undercutting a key rationale of expanding Medicaid in the first place.

Legislators have discussed raising the reimbursement rate for physicians from 71 percent of cost to 88 percent of cost, enough to induce most doctors to take on Medicaid patients. But that will require tens of millions of dollars more each year. A report by the Richmond Times-Dispatch mentioned a figure of $47 million, but that would average out to about $27 per Medicaid patient per year, which seems absurdly low. To boost physician reimbursements to a meaningful level, lawmakers likely will have to ask for a much larger sum in a future session.

Hospitals and doctors are following these developments closely and protecting their interests. Most Virginians aren’t. My prognostication: They’ll come out OK – and you’ll get stuck with a big Medicaid bill.

The Social Cost of Domestic Violence

Intimate Partner Violence (IPV) accounts for more than one in seven violent crimes in the United States. Between 16% and 23% of American women experience IPV while pregnant. Social science researchers have suggested that domestic abuse affects not only the mother-to-be but her unborn children, but the social cost of the problem has been difficult to measure.

A new study by three women, two economists and a health policy researcher, have found a way to compare the outcomes of women subjected to assault while pregnant versus those suffering violence up to 10 months after the estimated due date. They estimate the social cost per assault during pregnancy of nearly $42,000, implying a total annual cost to society of more than $4.25 billion.

“We find that prenatal exposure to assault is associated with an increased likelihood of induced labor, which is likely a response of the healthcare system to injuries sustained by pregnant victims of abuse,” write the authors of “Violence While in Utero: The Impact of Assaults During Pregnancy on Birth Outcomes,” a working paper published by the National Bureau of Economic Research.

There’s something in this study for everyone. For law-and-order types, the study shifts the prevalent preoccupation with the injustices of mass incarceration to the victims to crime. In addition to the obvious victims, the women subjected to assault, there are invisible victims: the lower birth-rate babies. Oh, and let’s not forget the general public, which winds up paying the medical bills to treat those  babies.

For social justice warriors, the authors remind us that “violence in utero is an important potential channel for intergenerational transmission of poverty.” Indirect costs come from increased childhood disability, decreased in adult income, increased medical costs associated with adult disability, and reductions in life expectancy. “Our results imply that interventions that can reduce violence against pregnant women can have meaningful consequences not just for the women (and their children), but also for the next generation and society as a whole.”

The authors don’t address the oft-noted observation that the American medical system has higher infant mortality rates than other developed countries. But their research sheds light on that phenomenon. The implication is that the higher incidence of infant mortality represents a failure of the U.S. health care system. But perhaps it really represents a higher rate of domestic violence than in other countries.

Hospital Collections Are Ugly but Not the Real Problem

Source: The Virginia Mercury

I have big issues with the way hospitals conduct business in Virginia, especially the highly profitable nonprofit hospitals, as I have repeatedly made clear on this blog. But there’s one thing I don’t have a problem with — the fact that they try to collect their bills. Some observers find that practice problematic. Witness the recent story published in the Virginia Mercury, which kicks off this way:

Annie Washington is 60 years old, has diabetes and no insurance. If she needs to see a doctor, she winds up in the emergency room. But while hospitals can’t turn indigent patients away, they can still bill them. And when patients can’t afford those bills, collection lawsuits often follow.

“I work at McDonald’s,” the Henrico County resident said after a recent hearing over an $860 lawsuit filed by the doctors group that staffs VCU Medical Center. “There’s no insurance there.”

Virginia medical providers filed more than 400,000 lawsuits over the past five years, netting more than $587 million in legal judgments against their patients, an analysis of state court records by the Virginia Mercury has found. The review relied on data collected by virginiacourtdata.org, which aggregates online state court records.

Virginia Mercury deserves credit for plumbing a data source which heretofore has gone unreported upon. I appreciate the reporters’ enterprise. But I take issue with the implication that there is something disreputable about making an effort to collect unpaid bills. The capitalist system is based upon the premise people pay for the things they buy. The underlying problem with Virginia’s health care system is not that hospitals ask people to pay their bills but the insane way — insane, as in utterly disconnected from reality — that they calculate the bills in the first place.

Hospital charges, which are deeply discounted for Medicare, Medicaid and private insurers but not for individuals, are obscenely and unconscionably high. Many people, perhaps most people, are unable to pay the charges. But what are hospitals supposed to do? Not bill people without insurance? Or, if they don’t pay, make no effort to collect? If it is widely known that there are no repercussions for failure to pay, what incentive is there for anyone to pay?

Hospitals routinely provide charity care and write off unpaid bills. But how are they supposed to know who has the capacity to pay and who doesn’t unless they try to collect?

Sentara Health System, according to Virginia Mercury, uses predictive data analytics like credit scores to surmise who might be able to may and who might not. Bon Secours has adopted a policy of forgiving the debt of anyone whose income is 200% of the federal poverty level. That’s all very admirable, but there’s always a cut-off at which the people just below the line (whether credit score or income) get off free and people just above the line get stuck. A precept of the welfare state is that no matter where you set the line, there is always someone who draws the wrong side of it and there’s always someone deserving of compassion. Because there is always a victim, there is always a reason to draw a new, more forgiving line. That is not a sustainable model for a health care system.

If we want to address root causes, we must address the skyrocketing price of healthcare — both the cost of providing the care, caused by the cartelization of the industry, and the setting of insanely high nominal prices, the sole purpose of which is to establish a starting position for negotiating with insurance companies.

Health Care Dies in Darkness

VCU Health System has broken ground on a $349 million outpatient facility, the largest investment in its history.

The City of Richmond has an annual budget of about $700 million a year. The city gets loads of coverage by local media. Henrico County has an annual budget of about $1 billion a year. County government doesn’t warrant the same number of column inches or minutes of air time, but local media do catch the highlights.

The publicly owned and operated VCU Health System has a budget of about $1.5 billion a year. The quality of medical care there has just as critical an impact on the lives of the Richmond-area residents as, say, schools, roads, and municipal services. Moreover, increases in hospital charges have rapidly outpaced the increase in local tax rates for years — perhaps decades. Yet no one raises a peep, and local media tell us nothing about the hospital’s internal deliberations.

My purpose here is not to dis local media, which are under tremendous cost-cutting pressure and have shrinking resources to cover the news. It is simply to suggest than an institution so large and vitally important to a community — and the same could be said of Sentara in Norfolk, Riverside in Newport News, Carilion in Roanoke, Inova in Northern Virginia, and the University of Virginia Hospital in Charlottesville — needs public accountability. Oversight is all the more imperative when an institution enjoys nonprofit status that frees it from the burden of paying property taxes, sales taxes, corporate income taxes, and miscellaneous levies and excises.

It’s fair to say that the general public knows almost nothing about how VCU is run, what it’s long-range goals are, or how well it’s doing its job. Its annual report (like all annual reports) is essentially a public relations document. The only glimmer of accountability comes from the Virginia Health Information website, which compiles hospital data and publishes some “efficiency” metrics,  but provides no narrative analysis.

VCU Health generated an operating income of $136 million in fiscal 2016 — $120 million, if non-operating gains and losses are taken into account. It enjoys a protected market thanks to state and federal restrictions on competition. What is the public getting for the quasi monopoly status conferred upon VCU and the massive profits it generates? Not efficiency, that’s for sure.

Source: Virginia Health Information

Virginia Health Information compares gross and net hospital revenues per admission, adjusting for the acuity of cases. (As a tertiary care hospital and trauma center, VCU gets a disproportionate share of the hard cases, but the VFI methodology accounts for that.) For both categories, VCU falls within the most expensive quartile of hospitals, as shown in the table above.

Source: Virginia Health Information

VHI also looks at underlying costs. Again, VCU consistently comes out as one of the most expensive hospitals in Virginia, whether labor cost per admission, non-labor cost, or capital cost. Other tables shows that productivity/utilization ratios fall in the bottom two quartiles.

Despite these unfavorable comparisons — which VCU undoubtedly will say are unfair, perhaps with good reason — the health system retains $120 million a year in profits (what VHI terms “Revenue and gains in excess of expenses and losses”). An industry rule of thumb is that hospitals need to retain 3% of their earnings to reinvest in new plant, equipment and technology. VCU retains 8%, a difference of about $75 million a year.

In theory, VCU could rebate that $75 million a year to the community in the form of lower charges to patients. But hospital management, with the backing of the VCU board, has chosen to invest in institutional expansion. That includes, most controversially, significant expenditures to create the Virginia Treatment Center for Children, even though philanthropist William H. Goodwin had pledged to give $350 million to create an independent children’s treatment and research hospital. VCU declined to collaborate with Goodwin, preferring to charge ahead with plans to keep the children’s hospital under its own corporate umbrella. Goodwin has not announced how he might otherwise dispose of his proposed gift, but there is no guarantee that the Richmond community will be the beneficiary.

Nonprofit hospitals, like colleges and universities, are not profit-maximizing institutions — they are prestige-maximizing institutions. Hospital administrators don’t go into the hospital business to make massive fortunes (although they do very nicely). They go into the hospital business to enhance the status of the institutions with which they are affiliated. Nonprofit status is not some magic fairy dust that makes self-interest and self-dealing disappear. As with the quest for profit, there is no limit to how much money hospital leaders will spend to advance their institutional standing in a never-ending race with other institutions seeking to do the same.

These massive revenue- and profit-generating enterprises — VCU is hardly alone — operate with no effective restraint or public oversight in Virginia. For time immemorial, Virginia’s news media has defined its mission as holding government entities accountable. It’s high time they begin holding nonprofit universities and hospitals accountable as well. But they can’t — they lack the resources. As nonprofit universities and hospitals metastasize, growing swaths of Virginia’s economy function in darkness.

Medicaid Expansion and the Coming Gusher of Hospital Profits


S&P Global Ratings, a big-three bond rating agency, predicts that Medicaid expansion will be “credit positive” for Virginia hospitals by reducing the level of uncompensated and charity care. Reports the Richmond Times-Dispatch:

The report does not change the current credit ratings of any Virginia health system, but S&P credit analyst Anne E. Cosgrove said the positive outlook “should help their bottom lines.”

“If you don’t have as much uncompensated care, this should help your underlying profitability,” Cosgrove said in an interview on Wednesday.

Virginia hospital officials played down the S&P announcement because they said enrollment under expanded Medical eligibility hasn’t begun and the benefits will vary among health systems depending on the mix of patients they serve.

Let’s get a sense of what the impact will be when an estimated additional 400,000 Virginians enroll in Medicaid. I have downloaded the latest financial data for Virginia acute care hospitals from the Virginia Health Information website, as displayed above. Collectively, they provided $2.6 billion in charity care and wrote off $1.9 billion in bad debts in the fiscal year 2016. They also made nearly $1.7 billion in profit (including “surplus” revenue reported by nonprofits).

Speaking in rough numbers, the federal and state budget for Medicaid expansion will inject about $3 billion annually into Virginia’s health system. I don’t know how that money is to be distributed between acute care hospitals, physicians, long-term care facilities and other medical providers. But for purposes of illustration and subject to verification, let us assume that one-third goes to acute care hospitals, thus reducing charity care and bad-debt write-offs by $1 billion. Virginia hospitals still will be providing a lot of free health care, but they could see a roughly 60% increase in profits.

So, yeah, I expect Medicaid expansion will be “credit positive” for the industry.

Now, let’s conduct another mental exercise. Let’s ask what the impact will be on Virginia’s most profitable hospitals. I totaled the charity care and bad debts for each institution and assumed that Medicaid would reduce them by one-third. Please note, these estimates represent no more than a Scientific Wild Ass Guess useful only for ascertaining order-of-magnitude effects. Here’s what the numbers look like:

Of the hospitals reporting the highest profits in FY 2016, all but Henrico Doctors Hospital were “non profit.”

As Bacon’s Rebellion readers know, I think profits are a beautiful thing. But some profits — those that arise from innovation, productivity, efficiency, and the like — are more socially beneficial than others. Profits that arise from creating monopolies and cartels, restricting competition through the exercise of political influence on government rules and regulations, and relentlessly jacking up charges to paying patients is not socially beneficial. The problem is compounded when the entities engaging in this behavior are nonprofit. Whatever else you say about the business practices of Andrew Carnegie, Henry Clay Frick and John D. Rockefeller, at least they paid taxes!

Bacon’s Rebellion will be watching hospital profitability closely. The big question: What will the highly profitable non-profits do with the gusher of money? Will they hold down charges to patients… or will they continue plowing the money into institutional expansion?

Update: Readers have pointed out that hospitals’ reports of charity care are wildly inflated because they are pegged to absurdly high nominal prices for care that almost no one pays. One implication is that hospitals are far less generous than they purport to be. Another is that my methodology for calculating the financial impact of Medicaid reform on profits is inflated by a similar amount.